401-Nay

In yesterday’s Lunch Buffet, I briefly noted Duncan Black’s (better known as Eschaton’s Atrios) op-ed in USAToday calling for a major increase in Social Security benefits to offset the “disaster” of the “401(k) experiment” which has left many millions of baby boomers facing retirement without the employer-based retirement resources that are supposed to represent one of the three legs of the “stool” of retirement security in this country (the other two being Social Security and personal savings).

Politically, at a time when there is enormous pressure to reduce Social Security benefits, Black’s call for a big and immediate boost isn’t likely to be taken up seriously in Congress.

But there are some smaller measures that could help, argues Anne Kim of the Corporation for Enterprise Development, in a web-exclusive article for the Washington Monthly. She shares Black’s fears about the inadequancy of 401(k)’s, partly because so many people have been forced to dip into them, despite heavy tax penalties, during the Great Recession:

According to HelloWallet’s report, Americans are withdrawing more than $70 billion a year from their retirement savings—and often paying big penalties to do so. On top of regular income taxes, early withdrawals are subject to a 10 percent additional tax penalty, which depending on the bracket, could eat up nearly half of a person’s withdrawal.

For many people, employer-sponsored retirement plans are the only mechanism “forcing” them to save. Yet the retirement-only focus of the current system isn’t versatile enough to meet people’s real needs—especially to cope with emergencies such as a job loss or a horrifically expensive car repair.

The depth and breadth of this ”leakage” from Americans’ retirement accounts means it’s time to rethink the kinds of savings accounts that all Americans should own. In particular, new ways to encourage emergency savings could help ensure that 401(k)s don’t continue to be an expensive, last-resort piggybank for so many Americans.

Part of the problem, says Kim, is that 401(k)’s have been subject to the same kinds of predatory financial practices as mortgages and credit cards, and need to be aggressively policed by the new Consumer Financial Protection Bureau, assuming congressional Republicans don’t succeed in smothering the infant agency in its crib.

But new means for emergency savings are needed as well. Kim mentions employer-linked emergency savings programs separate from 401(k)’s; broader access to disability and accident insurance; and a refundable “Saver’s Credit” that would be made available to low-income families who might otherwise never be able to save.

Whatever means are adopted, it’s past time for policymakers to stop thinking of 401(k)’s as a successful replacement for the defined-benefit pensions that are slowly beginning to fade from the scene just as baby boomers begin to retire in vast numbers. Before long, we are going to see a new crisis in old-age poverty, even as conservatives continue to claim we just can’t afford to do a thing about it.